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Cablegate: Argentina Economic and Financial Review, September

VZCZCXRO4543
PP RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHQU RUEHTM RUEHVC
DE RUEHBU #1890/01 2641445
ZNR UUUUU ZZH
P 211445Z SEP 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC PRIORITY 9301
INFO RUCNMRC/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 04 BUENOS AIRES 001890

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR CLAY LOWERY, NANCY LEE, AJEWEL, WBLOCK, LTRAN
NSC FOR JOSE CARDENAS, ROD HUNTER
PASS FED BOARD OF GOVERNORS FOR RANDALL KROSZNER, PATRICE
ROBITAILLE
PASS EXIM BANK FOR MICHELE WILKINS
PASS OPIC FOR JOHN SIMON, GEORGE SCHULTZ, RUTH ANN NICASTRI
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER

E.O. 12958: N/A
TAGS: EFIN ECON EINV AR
SUBJECT: ARGENTINA ECONOMIC AND FINANCIAL REVIEW, SEPTEMBER
5-14, 2007


1. (U) Provided below is Embassy Buenos Aires' Economic and
Financial Review covering the period September 5-14, 2007.
The unclassified email version of this report includes tables
and charts tracking Argentine economic developments. Contact
Econoff Chris Landberg at landbergca@state.gov to be included
on the email distribution list. This document is sensitive
but unclassified. It should not be disseminated outside of
USG channels or in any public forum without the written
concurrence of the originator. It should not be posted on
the internet.

----------
Highlights
----------

-- Presidential candidate Cristina Kirchner's
business-friendly speech promises continuation of current
economic policies
-- August CPI increases 0.6% m-o-m, roughly half of private
sector estimates
-- Argentine Court orders recalculation of CPI data
-- Argentina's trade balance down: overall, with Brazil, and
in budget projections
-- Election-year politics stop Buenos Aires City
under-the-table effort to improve its finances
-- September 12 airline strike paralyzes domestic travel

----------------
Economic Outlook
----------------

Presidential candidate Cristina Kirchner's business-friendly
speech promises continuation of current economic policies
--------------------------------------------- ------
2. (SBU) Leading Presidential candidate, Senator, and First
Lady Cristina Fernandez de Kirchner spoke on September 4 at a
high-profile lunch organized by the prominent Argentine
business association IDEA (Argentine Business Development
Institute), where she highlighted her interest in ensuring a
business and investor-friendly environment in Argentina.
Many of the Argentine and expatriate business elite attending
the lunch subsequently praised her welcoming approach to the
private sector, contrasting her attempt to build
relationships with the confrontational style of her husband,
President Nestor Kirchner.

3. (SBU) Nevertheless, many participants privately perceived
her comments as evidence of her intention to continue current
GoA policies. As a subsequent Deutsche bank report noted,
Cristina presented the key economic tenets of her government
as a continuation of her husband's policies; she praised
Nestor Kirchner's accomplishments and downplayed what many
see as growing risks and challenges to economic growth in
2008 (high inflation, excessive GoA expenditures, union's
demands for excessive salary increases). Her speech,
therefore, implied that post-election policy changes will be
gradual, and did not clarify how inclined she would be to
address what most economists consider an overheating economy.
Main highlights of Cristina's speech:

-- If elected, her government would target a primary fiscal
surplus of 3.15% of GDP in 2008. (Comment: the 2007 primary
fiscal surplus is estimated at 3.1 to 3.5% of GDP, but falls
to only approximately 2% when excluding one-off assets
transfer resulting from the 2007 pension reform. In order to
achieve a 3.15% primary surplus, Cristina's government would
have to decrease subsidies, particularly to the energy
sector, which -- in order to preclude an energy crisis --
would also probably require the GoA to allow increases to
energy prices that have been broadly frozen since 2002.)

-- She called for the creation of a "social pact" in 2008,
among government, the private sector, and labor unions.
(Comment: This has been interpreted as a means to encourage
moderation in union demands for formal sector wage increases
that exceed actual inflation. Other countries have used such
business/labor/government pacts, with questionable
effectiveness, as a means to control both wage growth and
price increases.)

BUENOS AIR 00001890 002 OF 004

-- She argued that Argentina's "competitive exchange rate is
not forever" and that competitiveness should not solely rely
on the exchange rate, but should be complemented by
technological and productive investment.

-- She supported the current administration's argument that
it has not manipulated official statistics, and stood by the
Argentine statistical agency INDEC's published CPI data (see
items below). She also denied that recent global market
volatility has had or would have an outsized impact on
Argentina. (Comment: private sector estimates for inflation
are now in the range of 15-20%, compared to INDEC's 8-9% for
the CPI.)

-- She promised an agreement with the Paris Club following
the October 28 elections.

-- She called recent austral winter energy shortages a
negative by-product of Argentina's rapid economic growth
since 2003. (Comment: At the conference, a draft study
prepared by the Technical Institute of Buenos Aires said that
Argentina will need $3-5 billion per year in energy sector
investment each year for the next 4-5 years to meet
burgeoning Argentine energy demand. End Comment)

---------
Inflation
---------

August CPI increases 0.6% m-o-m, roughly half of private
sector estimates
--------------------------------------------- --
4. (SBU) On September 6, the GoA statistical agency INDEC
announced that the August CPI increased 0.6% m-o-m, in line
with expectations that already anticipated significant
underreporting. Local private analysts estimate that the
published increase represents about half the "true" inflation
rate. As reported in the September 4 Report, provincial CPIs
indicate that "true" inflation for 2007 will be in the 15-20%
range. According to INDEC, accumulated inflation for the
first eight months of the year reached 5%, compared to the
8-10% rate that most private consultants estimate. The
sub-indexes with the largest m-o-m increases were: Education
(1.6%), health services (1.3%), food and beverages (1.2%) and
housing (1%), which were partially offset by a decrease of
1.2% in entertainment. Credit Suisse notes that the August
CPI does not point to any obvious manipulation of the data.
However, anecdotal evidence suggests that food and beverage
price increases have been much higher. (Note: food/beverage
prices are key data used in the measurement of indigence and
poverty levels. End Note)

Argentine Court orders recalculation of CPI data
--------------------------------------------- ---
5. (SBU) On September 12, Federal Judge Rodolfo Canicoba
Corral ordered the Federal Police and external experts to
verify whether INDEC authorities have manipulated CPI
statistics, based on confiscated INDEC forms containing
January price surveys. Judge Canicoba Corral said he would
use the results to decide whether to summon the Ministry of
Economy's Secretary of Internal Commerce, Guillermo Moreno,
known as the GoA's price control Czar, and other INDEC
authorities as defendants in a case on official statistics
manipulation. Simultaneously, a group of INDEC employees
reported to local press that they would submit a report to
the GoA outlining INDEC management's actions taken to force
INDEC's professional staff to manipulate statistics. These
include firing the head of the construction prices section in
early September, following her refusal to exclude some price
increases in the monthly cost of construction index.

6. (SBU) The experts that Judge Canicoba Corral designated
will attempt to use INDEC forms to reproduce INDEC's public
methodologies and compare the outcomes with INDEC's official
CPI reports. However, there are reports that INDEC personnel
destroyed many forms after the Courts issued an order to
confiscate the documents. Local analysts have pointed out
that this court-ordered recalculation could encourage

BUENOS AIR 00001890 003 OF 004


judicial cases against the GoA by holders of CPI-linked
Argentine debt, and could also complicate the GoA's wage
negotiations with unions. Federal Attorney Carlos Stornelli
initiated this judicial case after the GoA sacked INDEC
director Graciela Bevacqua last February due to her
opposition to GoA intervention in INDEC.

-----
Trade
-----

Argentina's trade balance down: overall, with Brazil, and in
budget projections
--------------------------------------------- ---
7. (SBU) Argentina's July 2007 trade surplus decreased almost
50% y-o-y to $479 million, totaling $10.7 billion in the 12
months ending July 31, 2007. July exports grew 22% y-o-y,
while imports grew 45%, totaling $50 billion and $39.2
billion respectively during the preceding 12 months. July
imports reached a single-month record of $4.1 billion.

8. (SBU) The falling July surplus was driven primarily by
reduced energy exports and increased energy imports, against
increased agricultural and automobile exports. Continued
cutbacks in energy exports (intermittent since 3Q06) have led
to a 17% y-o-y decrease from Jan-Jul 2007, and 32% y-o-y in
July alone. Increased energy imports have been more
dramatic: the y-o-y increases have been 44% for the first
seven months and 159% in July (totals of $1.4 billion and
$467 million respectively). More than 90% of the annual
increase in exports was in four sectors: cereals, oilseeds,
edible oils and automobiles, and much of that is due to
record harvests and rising world commodity prices.

9. (SBU) Meanwhile, official statistics indicate that
Argentina's trade deficit with neighbor and biggest trading
partner Brazil reached a monthly record of $512 million in
July -- 115% more than the July 2006 deficit -- for a
cumulative 2007 deficit of $2.43 billion, up 12% y-o-y.
Energy imports from Brazil through July 2007 grew 368% y-o-y
(to $173 million), but the largest dollar increases in July
imports from Brazil were in capital goods and automobiles,
which increased $112 and $99 million (56% and 96%)
respectively compared to July 2006.

10. (SBU) According to press reports about the GoA's 2008
budget proposal (presented to Congress September 19 by
Economy Minister Peirano), the trade surplus is projected to
total $11 billion for 2007 and $10.5 billion in 2008. These
are down from the $12.3 billion surplus in 2006, and well
below post-crisis surpluses of $16.4 and $15.5 billion in
2002 and 2003, respectively.

11. (SBU) These numbers appear in the context of Argentina
seeking to implement new trade measures to reduce imports of
manufactured goods from China and the GoA's current
participation in a Doha round negotiations in Geneva on
Agricultural, NAMA and Service sector modality papers.

-------
Finance
-------

Election-year politics brake Buenos Aires City effort to
improve its finances
--------------------------------------------- -
12. (SBU) Jorge Telerman, outgoing Mayor of the City of
Buenos Aires, announced August 24 increases in fees for ABL
services (ABL: Alumbrado, Barrido y Limpieza -- charges to
property owners for street lights, cleaning, and trash
collection). He justified the decision with the argument
that ABL fees are too low given the dramatic increases in
property prices over the last five years. He said this was
particularly true for upper-class neighborhoods, entailing an
unfair burden on poorer areas, which supported his
administration's decision to disproportionately apply the
increases on rich households. What Telerman did not publicly
highlight, however, is that the City is desperately searching
for ways to increase revenues to finance its budget deficit

BUENOS AIR 00001890 004 OF 004


of approximately ARP 1 billion ($315 million) before the
newly elected Mayor Mauricio Macri takes office in December.

13. (SBU) Telerman's administration intended for the
increased "fees" to help cover the financing gap without
calling it a tax increase (which would have required approval
of the Buenos Aires legislature). While the measure
technically entered into force August 27, it created a storm
of controversy that forced Telerman to shelve the initiative
temporarily, while a Congressional committee reviews the
issue. Opponents of the measure argued against it on
technical grounds (charging that the formula for applying the
increases was flawed). However, the opposition was led by
the Frente para la Victoria, President Kirchner's coalition,
and local press reported that they were motivated by
presidential election-year political considerations. As
supporting evidence of this allegation, the Congressional
committee participants have indicated that the City will not
implement the measure during 2007.

-----
Labor
-----

September 12 airline strike paralyzes domestic travel
--------------------------------------------- --
14. (SBU) On Monday, September 12, air cabin crew members
from Aerolineas Argentinas and its subsidiary Austral staged
a nationwide 24-hour strike that that forced the cancellation
of virtually all domestic flights and stranded 13,000 irate
passengers at Buenos Aires's Jorge Newbery Airport and most
provincial airports. Both airlines are owned by the Spanish
tourism group Marsans. The next day, the two carriers'
unions, working with GoA Ministry of Labor, reached agreement
with management on a 23% average monthly wage increase,
retroactive to April. The accord includes a "social peace"
clause in which the union agreed not to stage any job actions
until April 1, 2008. Flights were rescheduled for Tuesday,
and did not affect international arrivals or departures.
(Comment: some local analysts expect similar strikes in
other sectors, as unions stretch their muscles in the run-up
to the October 28 presidential election. End Comment)
WAYNE

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